ACG Research

ACG Research
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Wednesday, February 18, 2015

Worldwide Carrier Routing and Switch Market Posted Increases in 4Q

The Worldwide Carrier Routing and Switch market increased year over year q-q 1.5 percent and slightly increased 0.1 percent y-y, with revenues of $2.9 billion. The core routing segment posted revenues of $563 million, increasing 4.8 percent q-q but down 6.9 percent y-y. The edge/switching segment posted increased revenue of $2.3 billion, up 0.7 percent q-q and up 1.9 percent y-y. 

In 4Q14, the EMEA region increased revenue a solid 6.1 percent, and APAC grew revenue 4.7 percent. The Americas posted a decrease of 2.7 percent. 

Disruptive IT market trends continue to challenge the capabilities of networks and propel providers to consider software-defined networking as a vehicle to reduce service delivery costs and increase service velocity. This trend has affected the router and switch markets, resulting in limited spend in router and switch as carriers continue to explore SDN, trial SDN or implement SDN. The fourth quarter is usually an indicator for the coming year. 


Carriers’ ARPU is not sustainable and cannot maintain capex over revenues. Some carriers feel that flat revenue is acceptable; however, they do not seem to recognize that flat revenue is a race to the bottom. With capex the problem is not spending; it is about innovation, agility and operational costs and being able to compete more aggressively on deploying services. Explaining the repercussions of flat ARPU and exorbitant revenues ratios of ARUPs to an executive and any SPs with a “wait and see” position is going to be a challenge. Companies must understand that changing mindset is a top-level approach. 

Service providers are making significant investments, and companies such as AT&T, Verizon, Sprint, and T-Mobile are actually seeing solid profits. Sprint, which was late to market, posted profits in the 20 percent to 30 percent range. Verizon posted profits in the high 40 percent to 50s percent range. Most vendors saw decreased revenue in Q4, which can be attributed to the special promotions or end-of-year give-a-ways impacting their profit margins between 5–10 percent. 

Wireless is still a priority because of the revenue it is generating. Carriers’ aggregated ARPU for fixed data is flat. Fixed voice ARPU is starting to decrease. Mobile voice is also decreasing. From an aggregated perspective mobile data is flat. Although some carriers report profit margins most worldwide carriers (67) report that ARPU is flattening or decreasing. 

ACG is projecting the following in capex spending for 2015:
North America  -3%
Latin America  -4%
EMEA         +1.3%
APAC         -5%
China         +6%

2014 has been an interesting year for carrier routing, which has been affected by shifts in capex spending in wireline, mobile, SDN, and NFV. Operators are focused on monetizing their increasing data traffic, which is driving demand for mobile broadband. The need for more control of the network has produced more options available at the higher layers, such as software programmability and network analytics. This is where the long-term value is as hardware becomes simpler and more cost effective. New systems are being built on flexible platform architectures that are intelligent and open to enable programmability. With the creation and delivery of these intelligent platforms, developers and vendors can upgrade and share their systems rather than locking them down.

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